The Dangers of Listening to David Swensen

March 18, 2009

Dan Golden profiles David Swensen for Portfolio magazine:

On the other hand, Swensen points out, he’s still beating the stock market, which has slid by an even greater amount. When critics deride the performance of alternative investments, “they aren’t asking, ‘Relative to what?’ Hedge fund returns are negative. That’s very disappointing, but they’re still far superior to equity returns,” he insists, spinning the numbers like a campaign manager.

Is this just spin, or is there something to it? The fact is, as Dan told me, that it really doesn’t make sense to compare Swensen’s returns to a hypothetical endowment invested wholly in the stock market — because his big idea of picking up illiquidity premiums by investing permanent capital in highly-illiquid investments has been pretty much universally adopted by endowments at this point.

And besides, endowments were never invested 100% in equities, even long before Swensen arrived on the scene.

As Aaron Pressman points out, Swensen’s investment advice when it comes to retail investing hasn’t done so well of late:

If you take a simple mix of exchange-traded funds, allocate per Swensen’s book and look at the results over the past year, the bottom line is pretty ugly: -32%. That beats the S&P 500, but it’s much worse than a simple mix of say 70% U.S. stocks and 30% bonds, which lost only 25%. A 60/40 mix dropped 19%.
And a year-end rebalancing wouldn’t have helped — at least not yet. If you set Swensen’s allocations up at the beginning of 2008 (and lost 23%) and then rebalanced at the beginning of 2009, you’d be down 17% so far this year. But if you let your winners ride, so to speak, and went with the portfolio as it stood, you’d only be down 12%.

Swensen does seem to be a very good portfolio manager when it comes to managing his own billions. Whether or not he’s a good person to listen to when it comes to investment advice, however, is another matter entirely. If your name isn’t David Swensen, there’s very little chance that the Swensen technique will do as well for you as it does for him.

Reprinted from

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